Reduce Inventory Shrinkage to Increase Profits

In the Increase Profits with Batch Manufacturing Software blog (see link below), we touched on the top four things you can do with the help of batch manufacturing software, such as Vicinity. This ensures that your organization is getting the most out of operations with existing business, without altering many of your current processes.

Improve your existing business operations by reducing inventory shrinkage.

Shockingly, many formula manufacturers are attempting to run their business with 75% or less inventory accuracy. This means 75% of items in their systems do not accurately reflect what is on the floor. How can production be scheduled with such inaccurate information? How do you know which products are making you money? Counting inventory is tedious. Don’t waste valuable company time on something that you know will become out of sync quickly.

Test your method.

Go to your system (manual or computerized) and look up the quantity on hand of 10 raw materials. Next, count the inventory on hand. Of those items, how many times was your system equal to your physical count? Were eight correct? How about seven? If nine items do not agree by more than 5% – you have a problem.

For most formula manufacturers, the highest cost of operations is raw materials consumed to produce finished goods. We typically keep our inventory levels low to reduce the use of our operating capital. Therefore—keeping low levels of raw materials, and inventory is critical to our business. Stock-outs can cost us significant profits in lost sales or customer goodwill.

What steps can you take to take to reduce inventory shrinkage?

  1. Identify items with the most variance:
    • Review the results of your last physical inventory. Rank the items that experienced the highest level of variance (quantity adjustment* cost).
    • You will get the most bang for your buck by focusing attention on those items that have the highest variance. Addressing the issue in a high volume, low-cost item or a low volume, high-cost item will have little impact on profits today. Add a policy to mark all existing inventory and inbound receipts of these items with a red dot so everyone knows this item has experienced previous issues.
  1. Identify ways to better track items on the list – Look for ways to increase the likelihood that you get good counts for these items. Focus on the following activities:
    • Inbound materials from Suppliers – Work with suppliers to receive inventory in usable quantities.
    • Usage of materials on batch tickets – Add processes to double count these items when added to production.
    • Return of excess materials to stock after production – Avoid movement of these items if possible. If inventory must be returned to stock, add procedures to ensure the open container is the first to be used in the next production.
    • Recording disposal of obsolete/expired inventory – Add procedures to ensure material disposal is recorded in your system.

Once you have identified high variance items and established a process to track these items, cycle count them monthly. Record the variance each month. When you get three months of minimal variance to remove this item from the list and proceed to the next highest item on your list.

Long term, it is probable that you will want to automate much of this task with a computer system written specifically for the formula manufacturing industry. Vicinity Software utilizes multiple units of measure to assist your organization in recording information in a way that best fits your business. In general, your organization will need to get inventory accuracy in the 90% range before it has addressed the issue entirely. While the formula industry is known for inventory variations there is no reason any organization should not be achieving high levels of accuracy.

Stay tuned for the next blog on how to Reduce Formula Loss, and if you’d like to learn more about how Vicinity Software can help you reduce your inventory shrinkage, contact us today.

 

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